Deepwater Horizon disaster will “destabilize” the upstream and reinsurance markets: Willis

Willis Group Holdings has described the Deepwater Horizon offshore oil rig explosion as a market-changing event that is expected to harden the upstream and reinsurance markets.
“Even though a large portion of the Deepwater Horizon loss, which could amount to US$20 billion to $30 billion, is understood to be self-insured, [Willis] estimates that total claims to the market from the disaster, including control of well, re-drilling, third-party liability and seepage and pollution costs, could still be well in excess of US $1.2 billion,” the broker says in the Willis Energy Market Review.
The Deepwater Horizon rig in the Gulf of Mexico was valued at $560 million. Another US $140 million may have to be reserved to remove the Deepwater Horizon wreck from the seabed.
Alistair Rivers, CEO of Willis Energy, said: “The tragedy of the Deepwater Horizon loss – potentially the largest in the history of the upstream market – has come as a major shock that has fundamentally altered the existing market environment.”
Specifically, Willis said the loss may affect markets in the following ways:
•As a result of the Gulf of Mexico oil spill, the market has clearly hardened for offshore property risks.
•Furthermore, for marine liability risks such as offshore seepage, pollution and contamination insurance, it is likely that there will be a wholesale revision of the way in which this class of business is underwritten in the future.
•The reinsurance market is also likely to harden as well in response to the recent major losses.
•The impact of any future U.S. legislation on control of well and liability policy limits will likely force U.S. companies to carry much higher levels of insurance for deepwater activities in the future. It is possible other governments and legislatures may follow suit, increasing both demand and rates for these product lines.
•Any major losses during the 2010 Gulf of Mexico hurricane season could prompt a significant withdrawal of insurers from the market.
•Tougher underwriting stances may appear later in the year in anticipation of increased reinsurance costs and increased retentions, as well as Solvency II capital requirements.